Effects of Air Quality Regulation on in Polluting Industries

NBER Working Paper No. 6160Issued in September 1997NBER Program(s): PRPE

This paper examines unintended effects of air quality regulation on decisions of major polluters, using plant data for 1963 to 1992. A key regulatory tool since 1978 is the annual designation of county air quality attainment status, where non-attainment status triggers specific equipment requirements for" new and existing plants. We find, in the later years of regulation, that, ceteris paribus, non-attainment status reduces expected births in polluting industries by 40-50%, resulting in a shift of polluting activity to cleaner, less populated attainment areas. Starting in the 1970s effects appear first for industries with bigger plant sizes and then, within industries, first for corporate plants relative to the much smaller non-affiliate, or single plant firm sector. In all industries, non-affiliates face less regulation than the bigger corporate plants, resulting in a permanent shift away from corporate plant production in some industries. Older plants benefit from grandfathering provisions greatly enhancing survival probabilities. Finally, the negotiation and permitting process under regulation appears to induce much greater up-front investments by new plants, so that, in non-attainment areas, regulation induces 50-100% increases in initial plant sizes compared to attainment areas. But for plants over 10 years of age there are no size differences.